Pranab or no Pranab - Why India will motor along

June 28, 2012 08:23 IST

One of the primary contributors for many success stories has been the existence, functioning and domination of castes - yes castes - which urban Indian loves to hate, abuse and ridicule, writes M R Venkatesh.

"Oh Yes" and "Ok" were all they knew in English language before they proceeded to Europe to market their garments. That was in late eighties. With just this limited vocabulary in a foreign land these two garment manufacturers from Tamil Nadu impressed their client abroad, procured orders and successfully delivered. Years later their success (named Oh Yes Textiles & Ok Textiles) is part of folklore.

What makes the story riveting is that these two were not educated in any of the business schools. In fact, like many of their ilk in India, these two were perhaps not even fomally educated beyond high school. Yet they went on to become successful entrepreneurs. And if you think that this is an exception -think again - for the whole of India is replete with such anecdotes.

Naturally, all this makes India a fascinating study for economists, sociologists and perhaps political analysts. And like all success stories about India, it has been held back as a secret by the establishment, media, intelligentsia and of course academicians from our own people. After all, aren't we a nation of skeptics?

It is for these very reasons and despite its remarkable success, no B-school or management institute has undertaken an in-depth analysis of these success stories. And one of the primary contributors for such success has been the existence, functioning and domination of castes - yes castes - which urban Indian loves to hate, abuse and ridicule.

Benefitting from the lack of formal education

When the World Bank conducted its study a few years back about Western TN it came to a conclusion that this remarkable growth was due to the coordinated efforts of the local communities, (comprising Gounders, Naidus and Rajus) many of whom were high school dropouts.

What is stunning is that while our IIT and IIM graduates bemoan the lack of opportunity in India only to become employees abroad, these undergraduates and high school dropouts gave employment to several thousands - some of them being educated from the prestigious IIMs or IITs!

Viewed dispassionately, this lack of formal education was a blessing in disguise for it turned employees, for want of job opportunities, into employers. And such employers, because of caste and community affiliations turned their factories, not only to produce goods but also into a system that could in turn endlessly produce entrepreneurs out of relatives and kinsmen.

It is in this connection that the World Bank commented "Since 1985 Tirupur has become a hotbed of economic activity in the production of knitted garments. By the 1990s, with high growth rates of exports, Tirupur was a world leader in the knitted garments industry. The success of this industry is striking. This is particularly so as the production of knitted garments is capital-intensive, and the state banking monopoly had been ineffective at targeting capital funds to efficient entrepreneurs, especially at the levels necessary to sustain Tirupur's high growth rates."

So what was behind this story of unprecedented growth and development of Western TN? How was the capital, skill and technology available to people, who were as already pointed out, mere matriculates and in many cases much less.

It is here that the World Bank analysis becomes crucial. Pointing out to the emerging frontiers of economies that are able to develop, regulate and sustain themselves, the World Bank suggests that the economic prosperity of this region was largely because of its ability to manage its affairs by itself, raise capital from within and inspire others within the community to become entrepreneurs.

Another study by Dr Sharad Chari's titled Fraternal Capital: peasant workers, self-made men and globalisation in provincial India (Stanford University Press), tracing the rise of most entrepreneurs of this region who belong to local communities becomes instructive.

Likewise the World Bank's conclusion was stunning and much as it was forthright. It concluded that "The needed capital was raised within the Gounder community, a caste relegated to the land-based activities, relying on community and family network. Those with capital in the Gounder community transfer it to the others in the community through long-established informal credit institutions and rotating savings and credit associations. These networks were viewed as more reliable in transmitting information and enforcing contracts than the banking and legal systems that offered weak protection of creditor rights"

This in brief is the remarkable story of western Tamil Nadu as it could be of several places in India.

Boxed out by predatory global commerce

Cotton is now referred to as the White Gold. With India emerging as one of the largest producers of cotton, international influences on Indian cotton and India's influence on global cotton trade continues to grow exponentially.

No wonder a few weeks back the government banned export of cotton only to revoke the ban within a fortnight. Rumor has it that someone in the International futures market had put pressure on the Indian government to ban cotton exports. As India banned cotton exports, prices of cotton globally increased, albeit briefly.

Who gained or lost is anybody's guess, but is stated merely to illustrate the power of India as a cotton producer or exporter.

Naturally this has invited several international players to trade in the domestic cotton market. The net result was a skew in the competition - large multinational traders pitted against several small domestic purchasers and sellers. With extraordinary pockets, these traders could psyche the markets to suit their conveniences.

Nothing illustrates better that the manner in which cotton prices moved in the first half of 2011. From a benign Rs 30,000 per bale cotton prices rose sharply in the domestic markets to about Rs 66,000 per bale in April 2011. Naturally this created buying frenzy.

As a consequence, buyers went about to buy cotton at that elevated level assuming that the cotton prices would touch Rs 100,000 per bale shortly. It would be easy for anyone to criticise such behavior as foolish, but for that one has to be in business before making that observation.

As most domestic buyers had taken huge exposure to cotton at such elevated prices, cotton prices dropped dramatically within a fortnight in April 2011. In such roller coaster ride, the crucial point to note is that neither the farmers benefitted nor did the domestic buyers. The net impact - some of the domestic players had lost significantly so much so some even had their entire net worth wiped off. Importantly, this had a dampening impact on the economy already in recession mode.

The solution

All this would have dampened the spirit of entrepreneurs in any other country. Not to be outdone the remarkable spirit of these local people rooted to native intelligence is in full flow yet again. The lesson learnt from the rise and fall of cotton purchases in 2011 is that size matters, especially if one has to play even the local game at the local level.

Having learnt their lessons fully, entrepreneurs from this area are currently engaged in the process of setting up a Cotton Sourcing Company - COSCO - in short. This sourcing company will procure cotton both from India and abroad for the requirement of the entire region in bulk. And why not? After all, this area consumes approximately 40 per cent of the total Indian cotton consumption.

At the first stage, it will leverage on logistics and at the next stage attempt at volume discounts. Even a five percent saving at current prices of (approx) Rs 30,000 per bale works out to Rs 1,500 per bale. As this region consumes approximately 10 million bales, the savings per annum works out to approximately Rs 15,000 millions for the entire region!

Simultaneously negotiations are in advanced stage with bankers for funding this bulk purchase through cheaper modes of finance. This coupled with the idea of setting up huge warehouses, testing labs and procurement points across the country is surely bound to change the grammar of cotton trade in this country as it mitigates the debilitating price movements as witnessed in 2011.

All these efforts are sure to convert a 5 per cent loss for the industry into a 5 per cent profit - a whopping 10 per cent difference.

Common sense one would say. This is as simple as attempting to make competitors cooperate critical group functions. But the larger challenge is of arranging, aligning and making people accept the new paradigm, especially when people from diverse communities are concerned. Yet, this is what is happening in Tamil Nadu.

This is the true strength of India - the ability of her native entrepreneurs of India to adapt, adjust and arrange to the emerging situations is indeed remarkable. It may not be out of place to mention that whenever in an economic crisis, our leaders refer to this innate strength of India as the "fundamentals of the economy" and assure us as being "strong."

And on this our political leaders are spot on. The ability of our native entrepreneurs to work out solutions when none seemingly exist is legendary. COSCO is yet another example of how native intelligence brings about answers to seemingly complex problems.

Several FMs beginning Shanmukam Chetty (our first FM) to Pranab Mukherjee have either ignored or have been positively hostile towards this India. Yet it is this India that continues to motor on, employ people, manage mis-governance, overcome poor infrastructure and yet produce, compete profit and create wealth. Will the next FM at-least realise this?

The author is a Chennai-based Chartered Accountant. He can be contacted at mrv@mrv.net.in